Amid surging inflation, alarms have sounded over central banks’ focus on climate change and racial justice
Former Treasury Secretary Larry Summers’ criticism that the Federal Reserve and other central banks are focusing too much on “awakened” social issues reflects a growing concern that policymakers are not paying enough attention to the inflation.
Mr Summers, a Democrat, makes his point as Senate Republicans try to stop Congressional Democrats and President Biden from pressuring the Fed to install regional directors who would dedicate part of their functions to climate change and racial equity. Republicans describe the move as a dangerous case of “mission hijacking” from the central bank’s traditional role of ensuring maximum employment and price stability.
The 12 Republicans on the Senate Banking Committee fired a warning shot this month against the Fed’s regional offices in Boston and Dallas, which are looking for new presidents.
“Several regional Federal Reserve banks, including yours, have embraced politically charged social causes outside the Federal Reserve’s historic mission and statutory mandate,” the senators wrote to the Boston office. “This mission creep threatens the credibility and independence of the Federal Reserve. The role and purpose of federal regional reserve banks is to limit the concentration of power in DC and to represent the economic interests of their respective regions, not to engage in partisan politics.
Mr Summers sounded the alarm this month at a virtual conference hosted by the Institute of International Finance.
“We have a generation of central bankers who define themselves by their awakening,” said Summers, now a professor at Harvard University. “They define themselves by their social involvement. We are more at risk than we have in my career of losing control of inflation in the United States.
He said the problem is even worse in Europe.
Ludovic Subran, chief economist at the insurer and Germany-based asset manager Allianz SE, said Summers chose a “media-savvy” way of raising concerns about the growing role of central banks during the pandemic COVID-19 and the 2007-2008 financial crisis.
“There’s this idea that central banks have gone beyond their welcome by extending their tenure,” Subran told the Washington Times. “What he opposes is quite interesting, this idea that the distributive effects on the labor market are more important than price stability. This is actually asking a little: where do central banks stop? Right now, they do the heavy lifting for every problem, including climate change, including tackling inequality. “
He said of Mr. Summers’ criticism: “I don’t know if it was right to use that term. [wokeness], but what I find interesting is to ask the question of compromises.
Last year, Fed officials took a broader approach towards the goal of maximum jobs. They pledged to keep the benchmark interest rate close to zero even as inflation skyrocketed. Central bankers are also increasingly considering climate change as part of their portfolios.
Dean Baker, co-director of the Center for Economic and Policy Research, said the Fed “is doing the right thing in the face of the hysteria of its critics.”
“Critics want to see him act quickly to slow down the economy so that they can get good aid again at a low price,” he wrote in Eurasia Review. “Specifically, they would like to see the Fed end its quantitative easing program (buying bonds and other assets) and raising the short-term interest rate it controls, in order to reduce demand in the economy. “
Mr Baker said that higher interest rates “would slow down the economy by making it more expensive to buy homes and cars because they now have to pay a higher rate of interest on their mortgages and car loans. “.
In previous decades, he wrote, the Federal Reserve “has been very quick to raise interest rates because of concerns about inflation.”
“However, this is only half of the Fed’s mandate in conducting monetary policy,” he wrote. “It also has a mandate to promote a high employment rate. [Fed Chairman Jerome] Powell made a clear break with his predecessors by giving equal priority to a high employment rate, acknowledging the huge gains for the country from maintaining low unemployment rates. As Powell noted, the big winners from low unemployment rates are those at the bottom of the labor market – the people who experience the most discrimination. “
Consumer prices in the United States rose 5.4% in September from a year earlier, the Labor Department reported last week, tying the largest annual gain since 2008. Mr Biden said said in July that the high inflation rate was temporary, but some leading economists are now saying so. will likely persist for most of 2022.
“These pressures will persist until the middle of next year,” Gita Gopinath, chief economist of the International Monetary Fund, said on CBS ‘”Face the Nation” on Sunday. “And then we should see ourselves returning to more normal inflation levels by the end of next year. But that’s going to take a while, and we certainly see costs going up. Energy prices have gone up again. sharply increased at this time of year, and that will fuel headline inflation.
Former Fed Chairman Janet Yellen disagreed with Summers’ assessment.
“I think he’s wrong. I don’t think we’re about to lose inflation control, ”she said on CNN’s“ State of the Union ”. “As we move forward in the fight against the pandemic, I expect these [supply chain] bottlenecks are being resolved. Americans will return to the workforce as conditions improve. “
She said Democrats’ $ 1.9 trillion COVID-19 relief program this spring “partially caused this high demand for goods,” but it was also “very important in ensuring that the pandemic did not have a healing effect on American workers. “
“It gave them enough income and support to get by without – while still being able to put food on their tables and keep roofs over their heads,” Ms. Yellen told the host Jake Tapper.
Mr Summers cited several reasons for what he called his “very big concern,” including loose monetary policy, soaring house prices, a record federal budget deficit and excess household savings. He said central banks are not preparing investors for the drastic actions needed to control inflation.
“If these actions happen, they are going to be very shocking and very painful in the financial markets,” he said.
Republican lawmakers have expressed growing concern about where the Fed is heading. In March, Sen. Patrick J. Toomey of Pennsylvania, the top Republican on the Senate Banking Committee, opened an investigation into “mission drift” at the central bank’s 12 regional outposts.
He asked for information on the Federal Reserve Bank of San Francisco’s research on climate economics.
“A significant portion of the FRBSF research appears to focus on how issues unrelated to monetary policy impact on select subgroups of people,” Toomey wrote in a letter to Mary C. Daly, President and CEO of the Federal Reserve Bank of San Francisco.
Mr. Toomey and his Republican colleagues have said Federal Reserve banks in Atlanta, San Francisco and Minneapolis are the most active in advocating for social justice causes.
The Bank of Minneapolis has taken action to tackle racial inequality since George Floyd’s death in custody last year. The bank, led by Neel Kashkari, who led the Troubled Asset Relief Program under President Obama, has publicly “pledged to dismantle structural racism.”
The Fed began including climate change in its financial stability report and joined the Network of Central Banks and Supervisors for Greening the Financial System. She also created a committee to assess the potential impact of climate change on banks and markets.
“We question both the purpose and effectiveness of banking regulation and climate-related scenario analysis, in particular because the Federal Reserve has no environmental jurisdiction or expertise.” Mr. Toomey and other Republican senators told the Fed. “This effort is not grounded in science or economics, but rather is a self-fulfilling prophecy: pretend that there are financial risks with energy exploration and other underprivileged investments, then use the levers of the government – through the unelected bureaucracy – to prohibit or limit these activities. “